A decade shows that bonds beat shares

As published in The Australian on 22 August 2017

If you were asked to name the best performing asset in the past decade you’d probably choose residential property and you would be correct. You might then reasonably expect shares to come in well ahead of bonds, but actually bonds win

I’m taking the figures directly from the most recent ASX Russell Investments Long Term Investing Report which makes interesting reading for investors.

Here’s the numbers: Australian residential investment property was the gold medal winner, and over the past 10 years on a before tax, after fee basis, produced an 8.1 per cent per annum return. Second was global hedged bonds at 7.4 per cent per annum and coming in third was Australian bonds at 6.1 per cent per annum.

The returns quoted are absolute and give no indication of risk, which may alter the results. However, equities rank low in the 10 year results due to big falls during the global financial crisis.

The study also reported on traditional diversified funds over the same period. The typical target for a balanced fund in 2016 was CPI+3.5 per cent or 5.9 per cent. The gross return for a balanced fund – with a 70/30 split between growth/defensive assets was 5.4 per cent per annum, for a conservative managed fund 5.5 per cent and trailing these, growth funds were 5 per cent per annum.

Equity markets achieved double digit returns in 2016, as did many other alternate asset classes, including: high yield debt, listed infrastructure and property. However 10 year returns fell compared to 2015 results as 2006 was a stronger year than 2016 and the negative impact of the global financial crisis moved closer to the beginning of the period.

Powerful property

Residential property was the top performing asset class in 2016 and for the 10 and 20 year terms to December 2016. The report highlights the variances between and within states, different dwellings types and capital cities. Some key findings include:

National median house prices increased by 7.5 per cent for the 10 years to December 2016, yet units rose by 4.5 per cent and half the capital cities recorded no growth or negative returns.

Median Sydney house prices increased by nearly 12 per cent in 2016, but only 0.7 per cent for units in middle Sydney.

Adelaide’s median house price increased by 3.4% last year but fell by 15 per cent in the Riverland region.

Australian listed property returns were flat in 2016, as well as 2015 and the worst performing asset class delivering 0 per cent per annum over 10 years, well below inflation at 2.4 per cent per annum.

Over 20 years, Australian residential property delivered a gross return of 10.3 per cent per annum.

Better bonds

Bonds beat shares in 2015 and continued to outperform in 2016.

When taking into account tax, 10 year bond returns declined as returns are considered income, however returns still managed to beat shares when measured on an after tax lowest marginal tax rate basis, after tax highest marginal tax rate basis and if held in superannuation.

Over 20 years, Australian bonds returned 6.3 per cent per annum, behind global hedged bonds at 7.5 per cent per annum.

Surprisingly, Australian shares returned 4.3 per cent over the 10 years, ranking fifth, also outdone by global hedged shares which returned 5.5 per cent per annum, lower than long term expected averages. Over a 20 year period, Australian shares did much better at 8.5 per cent per annum, although this is still below the 10 per cent quoted in most textbooks. Once franking credits were taken into account, shares performed better.

Over 20 years, the research showed that investing via superannuation in shares added an extra 0.5 per cent per annum to gross returns. Investors on the highest marginal tax rate saw returns reduced by 1.8 per cent to 6.7 per cent per annum over the last 20 years.

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